What drives corporate investment?
This article examines the long-term decline of corporate investment in India as a share of GDP. It analyzes historical trends, including the impact of the Global Financial Crisis and the 2016 demonetization, while outlining key factors like profitability and credit costs.
Why it matters
Understanding the drivers of corporate investment is essential for diagnosing India's economic growth trajectory and identifying structural barriers to industrial expansion.
Corporate investment, as a share of GDP , has been declining in India for some time now (Chart 1) . This trend raises an important question: what explains this prolonged decline?
A few things stand out in Chart 1 . Corporate investment in India took off in 2004, when it jumped almost four percentage points, from 6.5% to 10.3%. After rising during the dream run of India’s growth story, it fell during the Global Financial Crisis (GFC), but began a steady revival till demonetisation hit the economy in 2016 (marked by a vertical line in the chart). Since then, the decline has been singular. So much so that the share has not even returned to the low levels during the GFC (see the horizontal dashed line).
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